Revenue Law and Practice - Question 1

Issue:

Whether Catherine would be considered a resident of Australia for tax purpose for the year income year ended 30 June 2020?

Law:

The residency test is applied every year as chosen on account of [1]FCT v Applegate . The way that a taxpayer is a resident in one year has no immediate bearing on the taxpayer's resident status for past or future years of income. Abode is the place wherein one carries on with, one's home. One point stayed muddled after the choice in Applegate's case is the significance of the time span the taxpayer is required to be away from Australia. This was investigated in FCT v Jenkins as follows:

  • the taxpayer still retained property in Australia
  • the taxpayer still retained a bank account in Australia
  • the taxpayer’s appointment to the New Hebrides was for a fixed term.

A basic actuality for the taxpayer in Applegate's case was the uncertain span of his stay. In that capacity, it was unrealistic to highlight some place in Australia as his permanent place of abode. Be that as it may, in Jenkins' case, the realities demonstrated the taxpayer didn't have such a goal to remain inconclusively in Vila and held property in Australia, yet was as yet ready to build up non-resident status through having a permanent place of abode in the New Hebrides for a characterized timeframe. The meaning of a 'resident' as it applies to people is found in s 6(1) ITAA 1936 and endorses four rules. It ought to likewise be recalled that for tax purposes a taxpayer can be resident in more than one place simultaneously as held on account of [2]Gregory v FCT. In other word an individual might be an Australian resident for tax purposes and be a resident of another nation for tax purposes based on that nation's tax residency rules. An individual's domicile is the legal connection between that individual and a domain with a particular legal framework which summons that framework as his own law: [3]Henderson v Henderson. Put another way, an individual's domicile is the place which is considered by law to be the individual's permanent home: Udny v Udny[4]

As far as the general law is concerned, residency, unlike domicile, does not have a single concept in Australian law. ‘Residence may mean one thing for the purposes of founding jurisdiction over a defendant, another thing in taxation matters, and yet another thing in matrimonial causes.’

This aspect of the definition in s 6(1) utilizes the word 'resides' in the ordinary feeling of the term. No further definition or explanation of 'resides' is given in the enactment, and in this way case law is needed to decide the significance of resides in the ordinary sense and all the applicable variables about a taxpayer must be weighed to come to an end result. 'Live' is characterized in the Oxford English Dictionary as: "to abode permanently, or for an impressive timeframe, to have one's settled or regular abode, to live in or at a specific place".

This understanding was acknowledged on account of Levene v IRC. The variables considered to decide whether a taxpayer is a resident of a specific nation can be distinguished concerning whether the taxpayer is physically present in that nation eventually during the year of income, the identity of the taxpayer, the historical backdrop of the taxpayer's residence, the taxpayer's mode of life, if the taxpayer is a guest to the nation, the recurrence, normality and span of visits and the motivation behind the visits and in case the individual is outside the nation for part of the important year of income then the family and business ties which the taxpayer has with the specific nation and whether a place of abode is kept up by the taxpayer in the significant nation or is accessible for the taxpayer's utilization should be thought of.

The Commissioner in Taxation Ruling TR 98/17 talks about what he considers the term 'live' to mean. The Ruling gives the Commissioner's translation of the ordinary significance of the word 'resides'. The Ruling applies to most people entering Australia including:

  • migrants (likewise allude to Taxation Ruling IT 2681 'Income tax: residency status of business migrants')
  • scholastics educating or concentrating in Australia
  • understudies concentrating in Australia
  • visitors on vacation
  • laborers with pre-orchestrated work contracts.

Another rule specifies that a taxpayer will be a resident of Australia if they have been in Australia for greater than 183 days either continuously or intermittently. This positive component of the rule can be defeated only if the Commissioner is satisfied the usual place of abode is outside Australia and the taxpayer does not intend to take up residence in Australia. The quantity of days is dictated by checking during the time to compute the 183-day cut-off, Wilkie v IRC. On the off chance that the estimation decides the taxpayer's duration of stay is for more than 183 days, at that point, by activity of s 6(a)(ii), the individual is a resident for the entire of the year of income except if the intention of the Commissioner is generally fulfilled.

Application:

Applying the above principles to the given factual scenario, it can be said that, Catherine is a resident of Australia for taxation purpose because for the year 2019-20, she was in Australia for more than 183 days and she has family ties in Australia. Even though she moved to Canada, she is still liable to pay tax as she satisfies most of the criteria of being an Australian resident. Even though Catherine has permanent place of abode outside Australia, the case of Levene v. IRC suggests that she must be tax by the Australian government for the income arising in Australia. This was also affirmed in the Applegate from which it can be said that, Catherine being a Canadian resident in the future has no nexus with paying tax in Australia for this year. However, the rules given in TR 98/17 does not apply to Catherine as she has permanent place of abode outside Australia and she visited Australia for just two weeks on a temporary basis. 

Conclusion:

From the above discussion it can be concluded by saying that, Catherine is an Australian resident for the year ended 2019-20 because she was in Australia for more than 183 days and she ha family ties present in Australia even though she does not intend to stay in Australia after this year.

Issue:

What amounts are assessable and Whether the amounts that are assessable for the purpose of tax are ordinary income under the meaning of section 6-5 of ITAA 1997?

Law:

Section 6-5 ITAA 1997 mirrors Australia's purview to demand income tax and that section gives that the assessable income incorporates income as indicated by ordinary ideas, which is called ordinary income. Section 6-5 expresses that:

  • on the off chance that an individual is an Australian resident, at that point assessable income incorporates the ordinary income you got straightforwardly or in a roundabout way from all sources whether in or out of Australia
  • on the off chance that an individual is a foreign resident, at that point assessable income incorporates: the ordinary income you got straightforwardly or in a roundabout way from every single Australian source and other ordinary income that an arrangement remembers for your assessable income on some premise other than having an Australian source.

Application:

In this case, Catherine must include in her assessable income all the amounts that has an Australian source. First, the salary from employment in Australia up to 1st October 2019 amounting to $9000 which is considered an ordinary income under section 6-5 of ITAA 1997. Second comes the salary from employment in Canada after 1st October amounting to $48,000 which is also an ordinary income. Third is the prize money amounting to $10,000 for winning the snowboard competition in Australia which is not an ordinary income but a statutory income, fourth is the interest amount from bank in Australia and lastly her interest amount arising from Canadian bank amounting to $50 and $80 respectively which are also statutory incomes. 

Conclusion:

It can be concluded by saying that, as Catherine in an Australian resident for the purpose of taxation in 2019-20, all the amounts arising in or out of Australia are assessable unless there is a double tax agreement that exists between Australia and Canada in which case, Catherine will be eligible to receive tax offsets from Australia government for the incomes arising in Canada.

Revenue Law and Practice - Question 2

Issue:

Whether receipts from sale of shares will be considered ordinary income under section 6-5 of ITAA 1997?

Law:

Section 6-5 ITAA 1997 mirrors Australia's locale to collect income tax and that section gives that the assessable income incorporates income as per ordinary ideas, which is called ordinary income. Section 6-5 expresses that:

  • In case a person is an Australian resident, your assessable income incorporates the ordinary income you got legitimately or by implication from all sources whether in or out of Australia
  • In case a person is a foreign resident, your assessable income incorporates the ordinary income you got legitimately or by implication from every Australian source and other ordinary income that an arrangement remembers for your assessable income on some premise other than having an Australian source.

Ordinary income' isn't characterized in the enactment and in this manner takes on its normal

law meaning. Throughout the long term, there have been numerous cases that have inspected this idea. Despite the fact that most of these cases concern prior section 25(1), they are similarly applicable for the reasons for section 6-5. The idea of 'income' has been inspected by the courts on many events, especially in cases managing previous s 25(1) ITAA36. The courts have in certain instances been hesitant to give a complete legal meaning of the term. Rather, judges have generally embraced a cycle of 'characterisation' in which they weigh up different variables to decide if a sum establishes income. In [5]GP International Pipecoaters Pty Ltd v FC of T , the High Court decides that different components are pertinent in assurance and some of the time, the character of receipts will be uncovered most plainly by their periodicity, normality or repeat; here and there, by the character of a privilege or thing discarded in return for the receipt; some of the time, by the extent of the exchange, adventure, or business in or by reason of which cash is gotten and by the beneficiary's motivation in participating in the exchange, adventure, or business. In addition to that, sell of shares gives rise to capital gains which are also ordinary in nature. As given by the Australian Taxation Office, a sale or disposal of property leads to a CGT event A1 and payment for shares lead to CGT event G1. Therefore, whenever there is monetary gain from sale of property either tangible or intangible in the form of rights , it gives rise to a capital gain event. Now it has to be noted that, whenever a gain has income nature, it is assessable under section 6-5 of ITAA 1997 but whenever a gain is of capital nature it is not assessable under section 6-5 because they are not ordinary in nature. As per the case of[6]FC of T v The Myer Emporium Ltd, some incomes are considered gains from profit making schemes.

Application:

From the given factual situation, it can be said that, the sale of shares by Mrs. Green in this regard gives rise to a capital gains event A1 as she disposed off some shares from which she made profits. As per the case of Myre Emporium, the sale of shares is considered an income from profit making scheme. She spent a significant amount of time on research and investment on shares from which she made gains. Even if she did not carry any business of selling or buying of shares, the profit made was private in nature and is eligible to be taxed under the Australian income tax laws.

Conclusion:

It can be concluded by saying that, the receipts from the sale of shares will be considered ordinary income under section 6-5 of ITAA 1997 even though it does not fall under the category of periodic payment.

Revenue Law and Practice - Question 3

Issue:

Whether the cost incurred by Waleed is eligible for deduction during the year ended 30 June 2020 under section 8-1 of ITAA 1997?

Law:

Section 8-1 of ITAA 1997 allows for general deduction. There are certain events when an expenses is considered deductible because they satisfy some criteria. Section 8-1 gives some positive limbs and negative limbs. Under the positive limbs, an expense is eligible for deduction only if that expense is incurred in earning an income which is assessable for taxation or an expense which is incurred to carry on a business which will in process earn assessable income. Therefore the basic laws means that deduction is allowed when an expense has direct nexus with the income producing process. On the other hand, the negative limb of section 8-1 says otherwise when deduction is not allowed. A deduction for an expense is not allowed when it is of capital nature and it is of private nature. This basically means that, if an expense is incurred that does not earn assessable income then it is not eligible for deduction or do not have direct nexus with the income producing process.

Application:

From the given factual scenario, it can be said that, the expense was incurred by Waleed for the rent and license to carry on a business from which he will earn assessable income. Therefore, by application of the above-mentioned law it can be implied that this expense is necessary for Waleed to earn assessable income which will be taxable under Australian Law. This satisfies the positive limbs of section 8-1 of ITAA 1997 and therefore is eligible for deduction.

Conclusion:

To conclude it can be said that, the expense of Waleed satisfies the positive limbs of section 8-1 of ITAA 1997 and therefore is deductible from his assessable income. The expense was a prepaid rent which is eligible for deduction in this regard. 

Revenue Law and Practice - Question 4

Issue:

Whether the items given are allowable for deduction under section of ITAA 1997 or 1936?

Law:

The basic rule under section 8-1 is allowed by the positive limbs. In case the expense are incurred to earn assessable income then the expenses are eligible for deduction from the assessable income. In case the expense are of private nature of does not earn assessable income or is incurred for facilitation of capital then it satisfies the negative limbs of section 8-1 and is not eligible for deduction. Even though every one of the two positive limbs and every one of the four negative limbs of s 8-1 are options, the expected exists for cover inside every one of the limbs. For example, a misfortune or active may fall inside both the first and second positive limbs. Likewise, a misfortune or then again friendly might be both capital and private in nature and accordingly fall inside the first two of the negative limb. The issue of distribution likewise emerged before on in [7]Ronpibon Tin NL v FC of T . For this situation, the High Court was approached to conceive whether the Commissioner has distributed the cost of regulation in the appropriate manner. The High Court held that, in allotting outgoings, it was important to figure out what extent of the costs were acquired in increasing assessable income.

Application:

The following expense are deductible:

  1. Queensland government stamp duty was incurred for the purchase of the apartment. This expense was necessary for acquiring the property which in the process gave assessable income in the form of rent therefore is deductible
  2. Legal fees is covered under section 8-1 positive limbs as it also facilitates the earning of assessable income.
  3. Loan application fees has no direct nexus with the income producing process therefore does not satisfy the positive limbs of section 8-1 thus not eligible for deduction
  4. Surveyor report cost also has no nexus with the income producing process and thus does not satisfy the positive limbs
  5. Cost of repairs as rules by taxation ruling 97/23 is deductible as they are not of capital nature.
  6. Intercom security camera is an expense which has a capital nature and is not necessary for earning assessable income therefore not deductible,
  7. Laundry tub repairs is necessary for earning assessable income there deductible,
  8. Landlord insurance is not deductible as it does not satisfy positive limbs rather satisfies negative limbs being private in nature
  9. Hot water system is of capital nature therefore satisfies the negative limbs of section 8-1 this not deductible
  10. Brisbane council rates is a types of fees that is paid to run a business therefore is eligible for deduction under section 8-1(ii) of ITAA 1997
  11. Legal fees is not eligible for deduction as it is not necessary for running business which will produce assessable income
  12. Car expense even though incurred for inspection of rental property has not connection with the income producing process and is of private nature and thus not eligible for deduction

Along with the above mentioned expenses, Loretta also incurred expense for the commission of real estate agent @10%.

Conclusion:

To conclude it can be said that, items a, b, e, g and j are deductible under section 8-1 of ITAA 1997.

Calculation of Net income or loss:

Particulars

Amount ($)

Amount ($)

Total Income

(450*50)

 

22,500

Less: deductions

   

Stamp duty

17,500

 

Legal and search fees

900

 

Repairs of bathroom tiles

1200

 

Laundry tub

700

 

Brisbane Council rates

2400

 

Total deduction

(22700)

 

Net Loss

 

200

References for Revenue Law and Practice

FCT v Applegate (1979) 9 ATR 899

FC of T v The Myer Emporium Ltd 87 ATC 4363

FCT v Jenkins (1982) 12 ATR 745

GP International Pipecoaters Pty Ltd v FC of T 90 ATC

Gregory v FCT (1937) 57 CLR 774

Henderson v Henderson (1965) 1 All ER 179

Taxation Ruling TR 98/17: Income tax: Residency Status of Individuals Entering Australia

Taxation Ruling TR 98/23: Income tax: deductions for repairs

Udny v Udny (1928) AC 217

Wilkie v IRC (1952) 32 TC 495

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